Advanced Accounting · Introduction to Accounting Standards

Applicability and Compliance with Accounting Standards (SMC and Non-SMC)

Updated 4 October 2026 · Fact-checked

Companies that do not follow Ind AS must follow the Accounting Standards in the Companies (Accounting Standards) Rules, 2021. Test each company against five conditions to classify it as a Small and Medium Sized Company (SMC) or a Non-SMC. A Non-SMC applies every standard. An SMC gets specified exemptions and relaxations.

Understand Applicability and Compliance with Accounting Standards

Section 129 of the Companies Act, 2013 requires financial statements to give a true and fair view and to comply with the accounting standards notified under section 133. For companies that do not follow Ind AS, those standards are the AS in the Companies (Accounting Standards) Rules, 2021. So the first question in any problem is: which framework applies to this company?

Ind AS applies to companies that are listed or in the process of listing on a recognised stock exchange in India or outside India (other than on an SME exchange), and to unlisted companies with a net worth of ₹250 crore or more. It also applies to the holding, subsidiary, joint venture and associate companies of those companies. Every other company follows the AS under the 2021 Rules. This topic deals with that second group.

The 2021 Rules then divide these companies into two classes: SMC (Small and Medium Sized Company) and Non-SMC. A Non-SMC must comply with all the standards in full. An SMC may take the exemptions and relaxations that the Rules give it. These cover some standards entirely and others only in part, mainly in disclosure and measurement.

A company is an SMC only if it meets all five conditions together. Fail even one and it is a Non-SMC. The thresholds are about listing, the type of business, turnover, borrowings and group links. Turnover and borrowings are tested on the figures of the immediately preceding accounting year.

The relief is not automatic forever. A company that ceases to qualify as an SMC gets no SMC relief in the current period. A company that was a Non-SMC and then becomes an SMC can claim the relief only after it remains an SMC for two consecutive accounting periods. If an SMC uses any relaxation, it should disclose that it is an SMC and has complied with the standards only to the extent applicable to it. The separate Level I, II and III classification used by ICAI for non-company entities is a different scheme. For a company question, use SMC and Non-SMC.

Key rules to remember

Five conditions for an SMC (all must be met): SMC = (1) not listed or in process of listing in India or abroad (equity or debt) AND (2) not a bank, financial institution or insurance company AND (3) turnover (excluding other income) ≤ ₹250 crore in the immediately preceding year AND (4) borrowings (including public deposits) ≤ ₹50 crore at any time in the immediately preceding year AND (5) not a holding or subsidiary of a company that is not an SMC; Failing any one condition makes the company a Non-SMC. Turnover excludes other income. Borrowings are checked at any time in the year, not just at year end.
Non-SMC: Non-SMC = every company following AS that is not an SMC; It must comply with all the Accounting Standards in full.
Company ceases to be an SMC: Status is tested on the immediately preceding year's figures. If the company fails the test → no SMC exemption or relaxation in the current accounting period; The company is treated as a Non-SMC for that period.
Non-SMC becomes an SMC: A company that was a Non-SMC and becomes an SMC → exemptions are available only after it remains an SMC for two consecutive accounting periods; This rule applies to a company that moves from Non-SMC to SMC. Until the two consecutive periods are complete, treat the company as a Non-SMC for exemptions.
Cash flow and segment reporting: AS 3 (Cash Flow Statements): not required for an SMC, required for a Non-SMC. AS 17 (Segment Reporting): applies only to enterprises whose equity or debt securities are listed or in process of listing; An SMC is unlisted, so it is not required to give segment reporting. An unlisted Non-SMC is also not required to give segment reporting under AS 17. Check listing for AS 17 and SMC status for AS 3.
Earnings per share: AS 20 applies to listed or in-process-of-listing enterprises and to any enterprise that discloses EPS. An SMC that discloses EPS need not disclose diluted EPS when it discloses basic EPS; The EPS relaxation covered on this page is for diluted EPS. It does not remove AS 20 for an enterprise that discloses EPS.
Disclosure when relaxations are used: SMC using any exemption or relaxation → disclose that it is an SMC and has complied with the AS only to the extent applicable; Write this in the financial statements. It is not optional.

How to solve Applicability and Compliance with Accounting Standards questions

Use this order for any question on applicability. It stops you from jumping to the exemption before you have classified the company.

1Check the framework first. If the company is covered by the Ind AS roadmap (for example, listed or in the process of listing other than on an SME exchange, or an unlisted company with net worth of ₹250 crore or more, or a holding, subsidiary, joint venture or associate of such a company), Ind AS applies and the SMC question does not arise. Otherwise the AS in the 2021 Rules apply.
2Test condition 1: is any equity or debt security listed or in process of listing, in India or abroad? If yes, the company is a Non-SMC. Stop.
3Test condition 2: is it a bank, financial institution or insurance company? If yes, Non-SMC.
4Test conditions 3 and 4 using the immediately preceding year: turnover excluding other income against ₹250 crore, and the highest borrowings at any time against ₹50 crore. Remember that borrowings include public deposits.
5Test condition 5: look at group links. If the holding company or any subsidiary company is a Non-SMC, this company is a Non-SMC.
6State the conclusion in one line (SMC or Non-SMC) and give the reason by naming the condition that decided it.
7If the company is an SMC, apply the specific exemption asked about (for example, no cash flow statement under AS 3). For AS 17, also check whether the company's securities are listed or in process of listing, because AS 17 applies only then. Then check the transition rules for a company that has just crossed a threshold.
8Close with the disclosure point: an SMC that uses relaxations must disclose that fact in its financial statements.

Quickest way: Five-gate check for MCQs and short answers

When to use it: Use it when the question gives a list of company facts and asks for the classification or the standard that applies. MCQs carry no negative marking, so always attempt every one.

Scan the facts for the quick disqualifiers: listed or in process of listing, bank or insurer, a Non-SMC parent or subsidiary. Any one makes the company a Non-SMC.
Compare turnover with ₹250 crore and the peak borrowings with ₹50 crore. Ignore other income. Look for a trap, such as a temporary spike in borrowings during the year.
Watch the boundary. A company with turnover or borrowings of exactly ₹250 crore or ₹50 crore still meets the condition. It fails only if the figure is above the limit.
For written answers, use a fixed format: Provision (the five conditions or the transition rule), Facts (each fact against each condition), Conclusion (SMC or Non-SMC and the resulting treatment). This earns step marks even if one number slips.
For the transition cases, write the year labels beside the facts, such as 2025-26 test for 2026-27, so the examiner can see the correct year was tested.

Common mistakes in Applicability and Compliance with Accounting Standards

Treating a company as an SMC because its turnover is below ₹250 crore, without checking the other four conditions.
Turnover is the number that stands out in the question, so students stop there.
Fix: Test all five conditions every time. Write them as a checklist in the margin and tick each one.
Including other income when testing the turnover limit.
Students use the total income figure given in the question.
Fix: Use turnover only, excluding other income, as the Rules define it.
Testing the current year's figures instead of the immediately preceding year's turnover and borrowings.
Students assume the test is on the reporting year.
Fix: Turnover and borrowings are tested for the immediately preceding accounting year. Label the year when you write the answer.
Classifying a small unlisted subsidiary as an SMC when its holding company is a Non-SMC.
The subsidiary's own numbers look small, so the group condition is ignored.
Fix: Always check condition 5. A holding or subsidiary of a Non-SMC cannot be an SMC.
Allowing exemption immediately when a Non-SMC becomes an SMC, or continuing it when an SMC stops qualifying.
Students remember the exemptions but not the transition rules.
Fix: Remember the two directions. If a company ceases to be an SMC, no relief in that period. If a Non-SMC becomes an SMC, exemptions are available only after the company remains an SMC for two consecutive accounting periods.
Saying an SMC is exempt from all Accounting Standards.
The word 'exemption' is read as complete freedom.
Fix: An SMC gets specific exemptions and relaxations. For example, AS 3 is not required for an SMC. Many other standards apply with partial relief, and the SMC must disclose its use of relaxations.
Saying a Non-SMC must always give segment reporting under AS 17.
Students link AS 17 to the Non-SMC label and forget its own scope condition.
Fix: AS 17 applies only to enterprises whose equity or debt securities are listed or in process of listing. An unlisted Non-SMC is not required to give segment reporting.

Worked examples

Example 1

Classify each unlisted company as SMC or Non-SMC for the year 2026-27, using the figures of 2025-26. (a) Alpha Ltd: turnover ₹180 crore, other income ₹30 crore, peak borrowings ₹35 crore; no group links. (b) Beta Ltd: turnover ₹120 crore, peak borrowings ₹55 crore during the year; no group links. (c) Gamma Ltd: turnover ₹40 crore, peak borrowings ₹5 crore; it is a subsidiary of a listed company.

Show the solution

Alpha: it is unlisted and not a bank, financial institution or insurer. Turnover excluding other income is ₹180 crore, which is not above ₹250 crore. Other income of ₹30 crore is ignored.
Alpha: peak borrowings of ₹35 crore are not above ₹50 crore. There are no group links. All five conditions are met.
Beta: it is unlisted and its turnover of ₹120 crore is within the limit. But its borrowings reached ₹55 crore at some time in the year, which is above ₹50 crore. Condition 4 fails.
Gamma: its own turnover and borrowings are within the limits. But its holding company is listed, so the holding company is a Non-SMC. Condition 5 fails.

Answer: Alpha Ltd is an SMC. Beta Ltd is a Non-SMC because its borrowings exceeded ₹50 crore at some point in the year. Gamma Ltd is a Non-SMC because its holding company is a Non-SMC.

Example 2

Delta Ltd is unlisted and is not a bank or an insurer. It has no group links and its borrowings were always below ₹50 crore. In 2024-25 its turnover was ₹200 crore and in 2025-26 it was ₹265 crore (excluding other income). The company was an SMC for 2025-26 and did not prepare a cash flow statement. Can it claim the SMC exemptions for 2026-27?

Show the solution

Provision: SMC status is tested on the immediately preceding accounting year's figures. For 2026-27 the test year is 2025-26. (For 2025-26 the test year was 2024-25, when turnover of ₹200 crore met the limit.)
Facts: turnover in 2025-26 is ₹265 crore, which is above ₹250 crore. Condition 3 fails. The other conditions are still met.
Conclusion on status: Delta Ltd is a Non-SMC for 2026-27.
Effect: a company that ceases to qualify as an SMC cannot claim SMC exemptions or relaxations in the current accounting period.
Therefore AS 3 must be applied for 2026-27, as it applies to a Non-SMC, and a cash flow statement must be prepared. AS 17 is not triggered by the Non-SMC status alone. Delta is unlisted, so it is not required to give segment reporting.

Answer: No. For 2026-27 Delta Ltd is a Non-SMC because its 2025-26 turnover of ₹265 crore exceeds ₹250 crore. It cannot claim SMC exemptions in that period and must comply with the standards in full, including AS 3, so it must prepare a cash flow statement. Segment reporting under AS 17 is not required because the company is unlisted.

Exam tips

Write the five conditions as a short list at the start of any classification answer. Then tick each one against the facts. This shows method and earns step marks.
In MCQs, look for traps in the wording: other income, peak borrowings during the year, public deposits counted as borrowings, and a holding or subsidiary that is a Non-SMC.
Always name the year being tested. Questions are often built so that the current year's figures would give the wrong answer.
Remember the AS 3 rule: an SMC is not required to prepare a cash flow statement, and a Non-SMC must. Use it when a question asks which company must prepare a cash flow statement. For segment reporting, check listing first, because AS 17 applies only to listed or in-process-of-listing enterprises.
In a theory answer, finish with the disclosure point: an SMC that uses a relaxation must say so in its financial statements.

Practice questions from Introduction to Accounting Standards

Applicability and Compliance with Accounting Standards in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Applicability and Compliance with Accounting Standards: frequently asked questions

What is the difference between an SMC and a Non-SMC for accounting standards?

A Non-SMC must follow every Accounting Standard in full. An SMC meets all five conditions in the 2021 Rules and may use the exemptions and relaxations given to it. For example, an SMC need not prepare a cash flow statement under AS 3.

Do all companies follow the Companies (Accounting Standards) Rules, 2021?

No. Companies covered by the Ind AS roadmap follow Ind AS. All other companies follow the Accounting Standards in the 2021 Rules. Within that group, the SMC and Non-SMC classification decides how much relief is available.

Is other income included in the SMC turnover limit?

No. The turnover limit of ₹250 crore is tested on turnover excluding other income. The test is made on the immediately preceding accounting year.

Can an SMC choose not to use the exemptions?

Yes. An SMC may opt to follow a standard in full. If it does use any exemption or relaxation, it should disclose in its financial statements that it is an SMC and has complied with the standards only to the extent applicable to it.

What happens if a company stops being an SMC?

It cannot claim SMC exemptions or relaxations in that accounting period and must comply as a Non-SMC. If a Non-SMC later becomes an SMC, exemptions are available only after the company remains an SMC for two consecutive accounting periods.